Financing and Money Laundering of Terrorism

1
Financing and Money Laundering of Terrorism
Instructors Comment A thorough research of the
related background information and issues, and an
interesting and bold(and creative) hypothesis,
which is the best part of this project.
2
World Map of Nominal GDP per capita
3
Wealth and Terrorism

• The map on the below displays the risk of
  terrorism in the all of the world's countries.
• The map on slide 2 shows the Nominal GDP of the
  world's countries.
• From the two diagrams there seems to be a
  correlation between countries wealth measured in
  GDP per capita and their Risk of Terrorism.
• Indicating that regions with low income are most
  threatened by terrorism.

4
Sources of Terrorist Financing

• Monitory Inflows
• Most terrorist organizations operate on a
  not-for-profit basis.
• Most of their financing comes from a number of
  sources
• State Sponsorship (Various governments sponsor
  terrorist organizations for political reasons)
• Donations from Civil or Religious Organizations
• Individual Financiers (E.g. Osama bin Laden)
• Extralegal Activities ( E.g sale of arms and
  narcotics, kidnappings, currency counterfeiting)
  
• Investments (E.g. Islamic Banking, Trusts)
• According the United States Department of State
  the 9/11 Terrorist Attacks on the Pentagon in
  Washington D.C and the World Trade Center in New
  York City cost 500 000 to orchestrate.
• The United States government is concerned because
  it is relatively inexpensive to conduct terrorist
  activities and in many cases they can be funded
  by a small group of individuals.
• Organized crime and terrorist groups both use
  legal organizations to conceal their illegal
  monetary activities.
• Unlike other forms of organized crime the
  majority of terrorist organizations are not
  concerned with their bottom line therefore, they
  are extremely dangerous as they can use all of
  the money at their disposal to do evil. While,
  organized crime is constrained by their desire to
  earn a profit.

5
Money Laundering Operations

• Movement of Capital
• Like all other organizations, terrorist groups
  utilize the services of accountants and lawyers
  to move their wealth throughout the world. They
  take advantage of the established channels for
  movement of their financial assets.
• One method to move capital is by using smuggled
  diamonds. These diamonds are then sold and
  converted into cash.
• A more sophisticated means to move capital is
  through trade-based laundry which involves the
  use of commodities, fictitious invoicing and
  rigging trades.
• In the Western Hemisphere the Black Market Peso
  Exchange is the greatest example of trade-based
  laundry. It is mainly concerned with
  reintroducing drug money into the financial
  system.
• Black Market Peso Exchange the exchange mainly
  involves Columbian banks who purchase American
  Dollars and convert them into Columbian Pesos
  usually at 40 below the market exchange rate.
• Then the banks deal with lawful contacts who want
  to import goods or services hence, they want to
  purchase cheap dollars. These businessmen usually
  buy the American currency at 20 below the
  official exchange rate. When their accounts are
  settled the drug money is laundered and
  reintroduced into the financial system.
• The banks make a profit from the margin of which
  they buy and sell the currency.

6
Laundering Through Imports and Exports

• Terrorist organizations also launder money
  through owning legitimate companies that engage
  in the imports and exports of goods.
• They can make money by either overvaluing imports
  or underpricing exports.
• If an import is overvalued there is a transfer of
  wealth from the importer to the exporter.
  Permitting the exporter which may be a terrorist
  organization to transfer money across borders
  unnoticed.
• On the other hand, if export is undervalued then
  a terrorist organization converts its money into
  goods. The products are then exported to an
  overseas partner where partner sells the products
  at their market price therefore, allowing money
  to be transfered across borders secretively.
• Undervaluing exports is the most common way to
  launder money out of the United States.
• Below are charts of that show items that are
  suspected to be used by terrorist organizations
  to launder money.

6
7
Purchasing Power Parity

• Trade Barriers
• One of the main reasons that terrorist
  organizations can use imports and exports as
  effective means of laundering money is because of
  the trade barriers that exist in most countries.
• Many of the of the countries where money
  laundering is most prevalent have restrictive
  trade barriers . (E.g. Iran, Columbia, North
  Korea, Russia)
• These barriers prevent Purchasing Power Parity
  from being established on a worldwide basis.
• Such barriers often prove to be advantageous for
  all criminal organizations including terrorist
  groups.
• As aforementioned terrorist groups are often
  affiliated with companies involved in enterprises
  involving imports and exports. Thus, the benefits
  that they get from underpricing exports can
  potentially be modified.
• In some export cases the exports do not have to
  be undervalued. As tariffs and trade barriers
  exponentially increase goods market value in the
  country where the products are transfered.
  Therefore, these organizations are able to
  transfer their funds secretively across borders
  and even earn interest on them.
• A possible solution to this problem is for the
  worlds countries to agree to enforce a free
  movement of capital for tradable goods. Thus,
  ensuring that Purchasing Power Parity holds and
  items are priced consistently throughout the
  world.
• In addition measure would permit law enforcement
  to detect discrepancies in the prices of tradable
  goods more easily allowing them to investigate
  money laundering cases more efficiently.

8
Globalization as a Cause for Terrorism

• Perceived Cultural Threat from the West
• There are various causes for terrorism, such as
• Nationalism/ Separatism
• Rebellion against government oppression
• Religion
• Desire for Political Change
• Globalization
• From the aforesaid causes the first four are
  straightforward however, globalization is the
  more complicated.
• Groups such as Al-Qaeda that advocateJihad
  against the United States and its allies.
  Al-Qaeda often cites globalization as a major
  cause of its aggression.
• Terrorism is used by these organizations to
  battle globalization which is seen by them as a
  substantial cause of poverty, illiteracy and a
  destroyer of cultural autonomy.
• It is for this reason that reason that terrorist
  organizations reject capitalism, democracy and
  freedom (as commonly defined in the modern
  western world).
• Jihad advocates believe that many third world
  countries are exploited by the American doctrine
  of globalization. Furthermore, they see America
  as the primary enforcer of the modern economic
  system which oppresses many third world
  countries.
• It is for this reason that failed states (E.g.
  Yemen and Afghanistan) pose the greatest
  terrorist risk to the United States.

9
Map of Sovereign States Current Account
Surpluses and Deficits
Map Key Red- deficit (more imports than
exports) Blue- surplus (more exports than
imports) Grey- no dat Current account balance
world figures, from CIA factbook, accessed April
2006.
10
Global Investment Trends and Terrorism

• The Economics Behind Jihadist
  Anti-Globalization Claims
• In class we learnt that there is a strong
  negative correlation between a country current
  account and investment in that country.
• From the map on slide 9 it clear that many
  countries that provide heavens to Al-Qaeda have
  positive (blue) trade balances. (E.g.Yemen,
  Indonesia, Lebanon, Syria, Algeria, Malaysia)
  Indicating that these countries most likely to
  lack the investment necessary for them to attain
  economic prosperity. Many countries that harbor
  Jihadist organizations experience little to no
  economic growth.
• Thus, providing at least a justification as to
  why they hate the United States, which is the
  most prosperous country in the world. They might
  rightfully believe that the United States is
  deflationary to their economies.
• It is no coincidence that the United States also
  has the worlds largest trade deficit. Trade
  deficits are determined by EX-IM S-I T-G.
• The majority of the worlds investors are
  confident that the United States will be the most
  prosperous nation in the future that they want to
  invest large amounts of capital in it hence,
  America cannibalizes the investment of the rest
  of the world.
• One of the reasons that these countries might be
  inclined to harbor Al-Qaeda is that it at least
  provides some investment. For these countries
  unlike the United States investment is hard to
  come by so they are more desperate and are
  willing to sacrifice their morals for it.
• In addition, they are more likely to be
  sympathetic to the idea of destroying the
  financial system of the modern world as they see
  themselves as the victims of this system they
  have nothing to lose and everything to gain.

11
Surveillance of Terrorist Finances

• Domestic Laws
• Terrorist Financing has been a concern of global
  governments even before the 9/11 terrorist
  attacks on the United States.
• In 1999 the United Nations passed the Terrorist
  Financing Convention after which a number of
  countries including France took measures to
  combat money laundering.
• France amended its anti-money laundering laws to
  include terrorism. It created new procedures to
  increase bank transparency and freeze assets.
• Since the 9/11 terrorist attacks, most of the
  worlds countries have taken measures to prevent
  terrorist organizations from laundering money
  within their borders.
• The Russian Federation adopted a presidential
  decree criminalizing the funding of terrorism and
  freezing the assets of terrorist organizations.
• In late October 2001 as a response to the
  attacks, the Uniting and Strengthening America by
  Providing Appropriate Tools Required to Intercept
  and Obstruct Terrorism Act of 2001 (also know as
  the Patriot Act) was passed in the United States.
  
• The Patriot Act requires that Suspicious Activity
  Reports are filed by financial brokers and
  institutions when they suspect money laundering.
  Furthermore, this act expended the powers of
  American law enforcement to monitor foreign
  banks.
• The Patriot Act also has punitive consequences
  for failure to comply reporting suspicious
  activities. These include the search and seizure
  of the funds that were either not reported or not
  reported properly. Moreover, the scope of the
  search and seizure is not limit to any currency
  or monitory instrument.

12
Surveillance of Terrorist Finances

• International Laws and Organizations
• Terrorist financing has been perceived as a
  crucial international issue since the United
  Nations 1999 Terrorist Financing Convention was
  passed.
• In addition, in the aftermath of the 9/11
  terrorist United Nation Resolution 1373 was
  adopted. This resolution criminalizes all
  terrorist financing activities and obligates all
  nations to prevent their citizens and companies
  from engaging in them.
• The United Nations Security Councils Counter
  Terrorism Committee was established to guarantee
  that all member nations abide by its
  anti-terrorism agreements.
• In addition, there are a number of Financial
  Intelligence Units that monitor the financial
  activities most of the worlds citizens and
  banks. Mostly these are not law enforcement
  agencies but they collaborate with law
  enforcement to process information necessary for
  convictions.
• An example of an of this type organization that
  operates on a global scale is the Egmont Group of
  Financial Intelligence Units. Its member
  organizations include
• Financial Transactions and Reports Analysis
  Centre of Canada (FINTRAC) in Canada
• Traitement du renseignement et action contre les
  circuits financiers clandestins (TRACFIN) in
  France
• Australian Transaction Report Analysis Centre
  (AUSTRAC) in Australia
• Financial Intelligence Centre (FIC) in South
  Africa
• Conselho de Controle de Atividades Financeira
  (COAF) in Brazil
• Japan Financial Intelligence Center (JAFIC)
• Federalnaja Sluzhba po Finansovomu Monitoringu in
  Russia
• Zentralstelle für Verdachtsanzeigen in Germany
• Financial Crimes Enforcement Network (FinCEN) in
  the US
• These organizations among others all cooperate,
  under the Egmont Groups leadership, sharing and
  managing information related to money laundering
  by criminal organizations such as terrorist
  groups.

13
Where Do Terrorists Choose to Invest?

• Southeast Asia
• All Asian states differ in how strictly they
  enforce Regulation 1373.
• In most Southeast Asian countries, with the
  exception of Singapore, the domestic agencies
  that are supposed to enforce anti-money
  laundering legislation are underfunded and do not
  have the capacities necessary to carry out this
  task effectively.
• Countries such as such as Cambodia and Thailand
  are reluctant to fight money laundering and
  terrorist finances for political reasons.
• Cambodia is willing accept terrorist investments
  because of the lack of financial inflows into the
  country.
• The citizens of Cambodia are resentful of the
  government tries to impose sanctions against the
  terrorist charities that operate within the
  country. They see it as unjustified external
  influence from the United States which creates
  unwanted political instability in the country.
• In addition, it is well documented that in
  Thailand around 2 billion dollars of drug money
  is laundered on an annual basis. The government
  is reluctant to fight money laundering because it
  is a large source of the countries prosperity and
  it will be difficult to replace.
• Terrorists organizations choose to use these
  markets because they have the experience to
  launder their money efficiently thus, the
  Southeast Asian markets have become some of the
  primary investment choices for terrorist
  organizations.
• In his paper regarding this matter Zachary Abuza
  points out, the problem isnt identifying the
  terrorist organizations or individuals but in
  the in the bureaucratic politics once these
  funders are identified.
• Zachary Abuza presents the example that in 2003,
  300 such entities or individuals were identified
  to be financing terrorism, but due to political
  games the list was narrowed down to 38.

14
Global Economic Impact of Terrorism

• Terrorism affects the global economy in the
  following ways
• Diminishes the capital stock both human and
  physical.
• Increases the economic uncertainly.
• Results in increased counter terrorism measures
  which divert resources from more productive
  industries.
• It has negative affects on the global tourism
  industry.
• A study conducted to determine the economic
  impact of the 9/11 terrorist attacks on the
  United states economy found that there was a loss
  of 0.06 in the productivity of the US economy.
• This had a long run negative impact of 0.3 on
  the United States Gross Domestic Product (GDP).
• Alberto Abadie and Javier Gardeazabal have
  developed an economic model to determine the
  impacts of terrorism on the global economy. Their
  model predicts that terrorist risk affects the
  international investment of countries.
• Moreover, their investigations point out there is
  a negative correlation between Foreign Direct
  Investment (FDI) over GDP and risk of terrorism.
• Another way that terrorism is described in an MIT
  paper entitled International Technologies for
  Control of Money Laundering.
• This paper argues that the exchange rate of the
  American Dollar is effected by the international
  surveillance on the currency. There is less
  demand for this currency as both investors and
  terrorist organizations as they know it is being
  surveyed. This decreases the market value of the
  American Dollar.
• There have been large controversies regarding
  breach countries of privacy laws as a result of
  financial surveillance. A recent example of this
  can be found in Belgium.
• For investors this is problematic as they value
  their privacy and especially fearful of
  information free-riders who could have negative
  impact on their investments.

15
Conclusion

• The financing and money laundering of terrorism
  is a complex global issue that is of concern to
  all of the worlds citizens.
• There does not seem to be a simple solution to
  this problem as in my many cases the prosperity
  of nations is directly linked to terrorist money.
  Due to the lack of investment these countries are
  often inclined to accept money intended for
  terrorism.
• Since terrorist organizations are not-for-profit
  organizations they are far more willing to invest
  in regions that are underdeveloped are considered
  to be unprofitable by legitimate businesses.
• The best way to combat terrorism in the long-term
  is to bring investment into the regions that
  foster terrorism. Thus, providing their
  governments with more incentives to fight the
  terrorist organizations that within their
  borders.
• This could be accomplished through collaboration
  between first worlds governments and these
  regions governments. Treaties that encourage the
  expansion of trade and investment have to be
  crafted.
• In the short-term, the political games within law
  enforcement agencies have to stop and all funds
  that are can be attributed to terrorism have to
  be frozen.
• In addition, governments that have a priority to
  stop global terrorism (such United States and
  United Kingdom) should invest more money into the
  law enforcement of the countries where terrorist
  financing and money laundering is prominent. As
  these countries agencies are often poorly
  equipped and neglected by their domestic
  governments.
• Ultimately this a global issue that has a direct
  impact on world prosperity and it requires a
  global solution that can only he achieved through
  the solidarity and the cooperation of all
  governments.

16

• Work Cited
• Terrorist maphttp//www.gccapitalideas.com/2010/0
  6/16/terrorism-reinsurers-standing-by-part-ii-risk
  s-threats-and-exposures/
• GDP Map http//www.econguru.com/2007-gdp-nominal-
  per-capita-world-map-imf/
• Bentekas, Ian. The International Law of
  Terrorist Financing. The American Society of
  International Law 97 (2003) 315-333.
• http//www.state.gov/p/inl/rls/nrcrpt/2003/vol2/ht
  ml/29843.htm
• http//www.hks.harvard.edu/fs/aabadie/twe.pdf
• http//www2.econ.uu.nl/users/unger/papers/Zdanowic
  z202.pdf
• Zachary Abuza. Funding Terrorism in Southeast
  Asia The Financing Network of Al Qaeda and
  Jemaah Islamiya. Contemporary Southeast Asia 25
  (2003) 167-197.
• http//www.pbs.org/wgbh/pages/frontline/shows/drug
  s/special/blackpeso.html
• Map Trade Balances http//commons.wikimedia.org/w
  iki/FileCurrent_account_balance_world.PNG
• http//www.imf.org/external/np/leg/amlcft/eng/aml1
  .htm
• http//www.un.org/en/sc/ctc/
• http//www.egmontgroup.org/about
• http//www.lanl.gov/orgs/nso/docs/fy07/LA-UR-07-80
  46_Causes_of_Terrorism.pdf
• All the journal articles I used are burned on
  the CD as PDFs in a folder next to the
  presentation.